If a client aged 55 takes a $3,000 distribution from a rollover IRA for college tuition, what is the tax consequence?

The correct answer is that the entire distribution is subject to income tax but is free from the 10% early withdrawal penalty.

When an individual under the age of 59½ takes a distribution from a traditional IRA, it generally triggers a 10% early withdrawal penalty in addition to regular income tax on the distribution. However, there are specific exceptions to this penalty. For distributions used to pay qualified higher education expenses, the early withdrawal penalty can be avoided.

In this case, although the client aged 55 is taking a $3,000 distribution for college tuition, which qualifies as a higher education expense, the distribution is still considered taxable income. This means that the client will owe regular income tax on the amount distributed. The key factor is the avoidance of the 10% penalty, which applies because the funds are being used for an educational purpose.

Thus, the client will face income taxes on the distribution, but the educational purpose of the withdrawal allows them to bypass the additional 10% penalty, making this situation particularly beneficial for covering college expenses.